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Citi beats expectations after loss on brokerage

NEW YORK -- Citigroup said Monday that it beat Wall Street predictions for quarterly earnings after stripping out a big loss on its retail brokerage and other one-time charges.

Net income was $3.3 billion, excluding one-time items. That amounts to $1.06 per share, beating the 96 cents predicted by analysts polled by financial data provider FactSet. Analyst predictions generally exclude one-time charges and gains.

Revenue, after the special charges, was $19.4 billion. That beat expectations of $18 billion.

The bank wrote down $4.7 billion after agreeing to sell its portion of retail brokerage Morgan Stanley Smith Barney for less than it had hoped. Including that and other one-time charges, net income was $468 million, and revenue was $14 billion.

Without the special charges, net income and revenue were both up. With them, net income and revenue were both down. Revenue in the investment bank's lending operations declined, while revenue from trading stocks and bonds rose.

In a statement, CEO Vikram Pandit exuded caution, noting that the bank had managed to increase its cushion of extra capital.

"We are managing risk very carefully given global economic conditions so we can continue to grow our businesses safely and soundly," Pandit said.

His bank's earnings also sounded a familiar theme for the banking industry this season: revenue powered by mortgages. Retail banking revenue jumped 35 percent, mostly because of mortgages.

In the depths of the 2008 financial crisis, mortgage lending was a scourge on many banks, with institutions like Wachovia and Bear Stearns collapsing under the weight of risky home loans they'd made or the exotic mortgage-backed securities they'd bet on.

For now, though, it's a boon. On Friday, both Wells and JPMorgan reported that a surge in home lending pushed them to record profits.

Still, the mortgage units are weathering a flood of lawsuits and regulatory charges. In August, Citigroup agreed to settle lawsuits from shareholders who said the bank didn't properly warn them of its exposure to risky subprime debt. The bank did not admit wrongdoing, but said it wanted to put the matter behind it.

Citi is the country's fifth-largest mortgage lender, according to the trade publication Inside Mortgage Finance, but it's a small player compared with Wells Fargo, which controls about a third of the market, and JPMorgan, which controls about 11 percent.

The bulk of the bank's one-time charges came from the $4.7 billion charge it took after agreeing to eventually sell its portion of retail brokerage Morgan Stanley Smith Barney to Morgan Stanley. The negotiations were a coup for Morgan Stanley: Citi didn't get nearly the price it was hoping for.

The charge is also greater than the bank had first estimated, $2.9 billion.

Citi is still reshaping itself from the financial crisis, when it was one of the most toxic banks among its peers and nearly collapsed. So CEO Pandit has been reshaping the bank into something smaller and, he hopes, more controllable, selling off units that he sees as non-essential.

Getting rid of the retail brokerage is a break from the plans of many of his peers, though. Banks are looking for reliable, if boring, sources of revenue, and brokerage is driven by fees that clients pay for getting advice on how to manage their money, rather than gains or losses made from the risky business of trying to predict the markets through trading.

Pandit said Monday that the deal with Morgan Stanley "has given us more certainty on our exit from that business," and also allowed the bank to trim the unit where it keeps crisis-era assets that it's trying to wind down.

The bank also had to take a one-time charge of $776 million because of a controversial accounting rule related to how banks value their debt. It forces banks to book a charge when the value of their debt rises, because theoretically, they would have to pay more to buy their bonds back from investors.

The rule has been sharply criticized by the banking industry as confusing or misleading, since it essentially crimps a bank's results it is doing well and boosts them when a bank is doing poorly. It's expected that the accounting rule could be phased out as early as next year.

Citi's stock price jumped nearly 2 percent before the market opened, rising 66 cents to $35.41.